PLANADVISER - July/August 2022 - 38

compliance consult
David Kaleda
Compliance for Wealth Managers
PTE 2020-02 cannot resolve all conflicts of interest
AS OF JULY 1, registered investment advisers and their
adviser representatives should now be in full compliance
with Department of Labor Prohibited Transaction Exemption
2020-02. Unsurprisingly, there has been considerable focus on
PTE 20-02, the past few months. However, wealth managers
who exercise discretion over the management
of certain account assets should
consider that they cannot exclusively
rely on this PTE to address all conflicts
of interest that may arise in conducting
their management activities. Thus, they
may need to turn to other exemptions
and should verify they have appropriate
compliance procedures in place.
If acting as a fiduciary to firm
accounts covered by the fiduciary provisions
of the Employee Retirement Income
Security Act and other accounts such as
individual retirement accounts subject to
the prohibited transaction provisions of
Internal Revenue Code Section 4975, the
adviser should avoid prohibited transactions
specified in ERISA Section 406 and
IRC Section 4975. The other alternative is
to comply with a prohibited transaction
exemption.
PTE 20-02 is the exemption on which most firms recently
only when the rollover or transfer occurs. Compliance with
the PTE will prevent a nonexempt prohibited transaction.
Still, PTE 20-02 does not exempt prohibited transactions
... they may
need to turn to
other exemptions
and should
verify they have
appropriate
compliance
procedures
in place.
have focused. This exemption is available to address
many prohibited transactions that occur when an adviser
provides investment advice for purposes of ERISA and the
IRC. However, many wealth managers provide discretionary
asset management services.
Indeed,
in many cases, the
provision of such services is a key selling point for a wealth
management relationship.
PTE 20-02 is available to address prohibited transactions
that arise in connection with an adviser's recommendation
to take a distribution from an ERISA-covered plan and roll
that amount into an IRA so the adviser may provide discretionary
management services to the money. Additionally,
compliance with PTE 20-02 will also address prohibited
transactions that arise when the adviser suggests that the
investor transfer assets from one IRA to another, particularly
if the person is in a brokerage account IRA and the
adviser will provide services in an advisory account IRA. In
either case, the DOL's view is that such a recommendation
creates a conflict because the adviser receives compensation
that arise regarding providing the discretionary management
services once the rollover or transfer occurs. Therefore,
for example, if the RIA can affect the
amount or timing of compensation that it,
its adviser representatives or its affiliates
are paid as a result of the RIA's exercise of
discretion, prohibited transactions under
ERISA Sections 406(b)(1) and 406(b)(3)
and IRC Sections 4975(c)(1)(E) and 4975(c)
(1)(F) will likely occur; to avoid them, the
adviser must comply with an exemption
or otherwise eliminate the conflict.
Such conflicts can arise in a number
of situations, including when: 1) the
client invests in a mutual fund to which
the adviser or an affiliate is an adviser
or underwriter; 2) the client invests in
other types of funds, services or products
with regard to which the adviser or its
affiliate receives compensation or other
benefit; 3) the adviser or affiliate receives
compensation such as revenue sharing or
other payments from unaffiliated investment funds or third
parties in connection with exercising discretion; and 4) the
adviser or its affiliates receives commissions in connection
with the exercise of discretion.
These transactions can be addressed by being sure to-
and making sure all affiliates-comply with DOL guidance
such as Advisory Opinions 97-15A and 2005-10A-aka the
" Frost opinion " and " Country Trust opinion, " respectively.
This guidance effectively requires a level fee across the
adviser firm and all of its affiliates. Otherwise, the adviser
should comply with available exemptions such as PTE 77-4,
PTE 86-128 and ERISA Section 408(b)(8).
In summary, PTE 20-02 is an effective exemption for
wealth managers in situations where they provide investment
advice. But when they exercise investment discretion,
they should look to other exemptions or other ways to
address any prohibited transactions.
David Kaleda is a principal in the fiduciary responsibility practice
group at Groom Law Group, Chartered, in Washington, D.C.
38 | planadviser.com July-August 2022
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PLANADVISER - July/August 2022

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